UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q

T    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014 
 
OR

£    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from                      to                      

Commission File Number 1-8957
ALASKA AIR GROUP, INC.

 	 	 	
Delaware	 	91-1292054	
(State of Incorporation)	 	(I.R.S. Employer Identification No.)	

 	
 	
19300 International Boulevard, Seattle, Washington 98188	
Telephone: (206) 392-5040	

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  T   No  £  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  T  No  £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   T	Accelerated filer  £ 	Non-accelerated filer   £	Smaller reporting company   £	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
 
The registrant has 134,882,465 common shares, par value $0.01, outstanding at July 31, 2014.

ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2014 

 TABLE OF CONTENTS

 	 	 	
PART I.	FINANCIAL INFORMATION	4	
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4	
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20	
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	36	
ITEM 4.	CONTROLS AND PROCEDURES	36	
PART II.	OTHER INFORMATION	37	
ITEM 1.	LEGAL PROCEEDINGS	37	
ITEM 1A.	RISK FACTORS	37	
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37	
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37	
ITEM 4.	MINE SAFETY DISCLOSURES	37	
ITEM 5.	OTHER INFORMATION	37	
ITEM 6.	EXHIBITS	38	
 	SIGNATURES	38	

As used in this Form 10-Q, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:
 	 	
•	the competitive environment in our industry;	
 	 	
•	changes in our operating costs, primarily fuel, which can be volatile;	
 	 	
•	general economic conditions, including the impact of those conditions on customer travel behavior;	
 	 	
•	our ability to meet our cost reduction goals;	
 	 	
•	operational disruptions;	
 	 	
•	an aircraft accident or incident;	
 	 	
•	labor disputes and our ability to attract and retain qualified personnel;	
 	 	
•	the concentration of our revenue from a few key markets;	
 	 	
•	actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;	
 	 	
•	our reliance on automated systems and the risks associated with changes made to those systems;	
 	 	
•	changes in laws and regulations.	

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2013. Please consider our forward-looking statements in light of those risks as you read this report.

3

PART I

 	
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 	 	 	 	 	 	 	 	
(in millions)	June 30,
2014	 	December 31,
2013	
ASSETS	 	 	 	
Current Assets	 	 	 	
Cash and cash equivalents	$	22	
 	 	$	80	
 	
Marketable securities	1,488	
 	 	1,250	
 	
Total cash and marketable securities	1,510	
 	 	1,330	
 	
Receivables - net	203	
 	 	152	
 	
Inventories and supplies - net	61	
 	 	60	
 	
Deferred income taxes	112	
 	 	113	
 	
Prepaid expenses and other current assets	134	
 	 	107	
 	
Total Current Assets	2,020	
 	 	1,762	

Property and Equipment	 	

Aircraft and other flight equipment	4,993	
 	 	4,677	
 	
Other property and equipment	867	
 	 	838	
 	
Deposits for future flight equipment	431	
 	 	446	
 	
 	6,291	
 	 	5,961	
 	
Less accumulated depreciation and amortization	2,189	
 	 	2,068	
 	
Total Property and Equipment - Net	4,102	
 	 	3,893	

Other Assets	192	
 	 	183	

Total Assets	$	6,314	
 	 	$	5,838	

See accompanying notes to condensed consolidated financial statements.

4

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 	 	 	 	 	 	 	 	
(in millions, except share amounts)	June 30,
2014	 	December 31,
2013	
LIABILITIES AND SHAREHOLDERS' EQUITY	 	 	 	
Current Liabilities	 	 	 	
Accounts payable	$	71	
 	 	$	64	
 	
Accrued wages, vacation and payroll taxes	166	
 	 	211	
 	
Other accrued liabilities	706	
 	 	624	
 	
Air traffic liability	807	
 	 	564	
 	
Current portion of long-term debt	114	
 	 	117	
 	
Total Current Liabilities	1,864	
 	 	1,580	

Long-Term Debt, Net of Current Portion	745	
 	 	754	
 	
Other Liabilities and Credits	 	

Deferred income taxes	725	
 	 	709	
 	
Deferred revenue	342	
 	 	335	
 	
Obligation for pension and postretirement medical benefits	123	
 	 	123	
 	
Other liabilities	315	
 	 	308	
 	
 	1,505	
 	 	1,475	
 	
Commitments and Contingencies	

 	
 	
Shareholders' Equity	 	

Preferred stock, $0.01 par value Authorized: 5,000,000 shares, none issued or outstanding	—	
 	 	—	
 	
Common stock, $0.01 par value, Authorized: 200,000,000 shares, Issued: 2014 - 136,845,596 shares; 2013 - 137,533,382 shares, Outstanding: 2014 - 136,738,034; 2013 - 137,491,906	1	
 	 	1	
 	
Capital in excess of par value	551	
 	 	606	
 	
Treasury stock (common), at cost: 2014 - 107,562 shares; 2013 - 41,476 shares	(5	)	 	(2	)	
Accumulated other comprehensive loss	(178	)	 	(183	)	
Retained earnings	1,831	
 	 	1,607	
 	
 	2,200	
 	 	2,029	
 	
Total Liabilities and Shareholders' Equity	$	6,314	
 	 	$	5,838	

See accompanying notes to condensed consolidated financial statements.

5

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
(in millions, except per share amounts)	2014	 	2013	 	2014	 	2013	
Operating Revenues	 	 	 	 	 	 	 	
Passenger	 	 	 	 	 	 	 	
Mainline	$	974	
 	 	$	896	
 	 	$	1,828	
 	 	$	1,692	
 	
Regional	200	
 	 	192	
 	 	386	
 	 	374	
 	
Total passenger revenue	1,174	
 	 	1,088	
 	 	2,214	
 	 	2,066	
 	
Freight and mail	32	
 	 	30	
 	 	56	
 	 	56	
 	
Other - net	169	
 	 	138	
 	 	327	
 	 	268	
 	
Total Operating Revenues	1,375	
 	 	1,256	
 	 	2,597	
 	 	2,390	

Operating Expenses	 	 	 	 	 	

Wages and benefits	281	
 	 	258	
 	 	553	
 	 	522	
 	
Variable incentive pay	29	
 	 	21	
 	 	54	
 	 	42	
 	
Aircraft fuel, including hedging gains and losses	360	
 	 	372	
 	 	718	
 	 	753	
 	
Aircraft maintenance	57	
 	 	67	
 	 	108	
 	 	133	
 	
Aircraft rent	29	
 	 	30	
 	 	57	
 	 	59	
 	
Landing fees and other rentals	64	
 	 	75	
 	 	133	
 	 	136	
 	
Contracted services	62	
 	 	54	
 	 	122	
 	 	107	
 	
Selling expenses	53	
 	 	51	
 	 	99	
 	 	89	
 	
Depreciation and amortization	73	
 	 	68	
 	 	143	
 	 	136	
 	
Food and beverage service	23	
 	 	21	
 	 	44	
 	 	41	
 	
Other	81	
 	 	65	
 	 	161	
 	 	133	
 	
Total Operating Expenses	1,112	
 	 	1,082	
 	 	2,192	
 	 	2,151	
 	
Operating Income	263	
 	 	174	
 	 	405	
 	 	239	

Nonoperating Income (Expense)	 	 	 	 	 	

Interest income	5	
 	 	4	
 	 	10	
 	 	9	
 	
Interest expense	(12	)	 	(14	)	 	(25	)	 	(29	)	
Interest capitalized	4	
 	 	5	
 	 	9	
 	 	9	
 	
Other - net	5	
 	 	—	
 	 	18	
 	 	1	
 	
 	2	
 	 	(5	)	 	12	
 	 	(10	)	
Income before income tax	265	
 	 	169	
 	 	417	
 	 	229	
 	
Income tax expense	100	
 	 	65	
 	 	158	
 	 	88	
 	
Net Income	$	165	
 	 	$	104	
 	 	$	259	
 	 	$	141	

Basic Earnings Per Share:	$	1.20	
 	 	$	0.75	
 	 	$	1.88	
 	 	$	1.00	
 	
Diluted Earnings Per Share:	$	1.19	
 	 	$	0.74	
 	 	$	1.86	
 	 	$	0.99	

Shares used for computation:	 	 	 	 	 	 	 	
 	
Basic	137.274	
 	 	140.504	
 	 	137.304	
 	 	140.683	
 	
Diluted	138.711	
 	 	142.319	
 	 	138.776	
 	 	142.594	

Cash dividend declared per share:	$	0.125	
 	 	—	
 	 	$	0.250	
 	 	—	

See accompanying notes to condensed consolidated financial statements.

6

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended June 30,	 	Six Months Ended June 30,	
(in millions)	2014	 	2013	 	2014	 	2013	
 	 	 	 	 	 	 	 	
Net Income	$	165	
 	 	$	104	
 	 	$	259	
 	 	$	141	

Other comprehensive income (loss):	 	 	 	 	 	 	 	
Related to marketable securities:	 	 	 	 	 	 	 	
Unrealized holding gains (losses) arising during the period	4	
 	 	(11	)	 	7	
 	 	(12	)	
Reclassification of (gains) losses into Other-net nonoperating income (expense)	(1	)	 	(1	)	 	(1	)	 	(2	)	
Income tax effect	(1	)	 	4	
 	 	(2	)	 	5	
 	
Total	2	
 	 	(8	)	 	4	
 	 	(9	)	
 	 	 	 	 	 	 	 	
Related to employee benefit plans:	 	 	 	 	 	 	 	
Reclassification of net pension expense into Wages and benefits	3	
 	 	11	
 	 	5	
 	 	21	
 	
Income tax effect	(1	)	 	(3	)	 	(2	)	 	(7	)	
Total	2	
 	 	8	
 	 	3	
 	 	14	

Related to interest rate derivative instruments:	 	 	 	 	 	 	 	
Unrealized holding gains (losses) arising during the period	(2	)	 	7	
 	 	(5	)	 	10	
 	
Reclassification of (gains) losses into Aircraft rent	1	
 	 	2	
 	 	3	
 	 	3	
 	
Income tax effect	—	
 	 	(4	)	 	—	
 	 	(6	)	
Total	(1	)	 	5	
 	 	(2	)	 	7	

Other comprehensive income	3	
 	 	5	
 	 	5	
 	 	12	

Comprehensive income	$	168	
 	 	$	109	
 	 	$	264	
 	 	$	153	

See accompanying notes to condensed consolidated financial statements.

7

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 	Six Months Ended June 30,	
(in millions)	2014	 	2013	
Cash flows from operating activities:	 	 	 	
Net income	$	259	
 	 	$	141	
 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	

Depreciation and amortization	143	
 	 	136	
 	
Stock-based compensation and other	21	
 	 	17	
 	
Changes in certain assets and liabilities:	 	 	 	
Changes in deferred income taxes	14	
 	 	16	
 	
Increase in air traffic liability	243	
 	 	190	
 	
Increase (decrease) in deferred revenue	7	
 	 	12	
 	
Other - net	(52	)	 	80	
 	
Net cash provided by operating activities	635	
 	 	592	

Cash flows from investing activities:	 	

Property and equipment additions:	 	

Aircraft and aircraft purchase deposits	(255	)	 	(233	)	
Other flight equipment	(60	)	 	(12	)	
Other property and equipment	(35	)	 	(13	)	
Total property and equipment additions	(350	)	 	(258	)	
Purchases of marketable securities	(628	)	 	(720	)	
Sales and maturities of marketable securities	398	
 	 	465	
 	
Proceeds from disposition of assets and changes in restricted deposits	(2	)	 	1	
 	
Net cash used in investing activities	(582	)	 	(512	)	
 	 	 	 	
Cash flows from financing activities:	 	

Proceeds from issuance of debt	51	
 	 	—	
 	
Long-term debt payments	(64	)	 	(109	)	
Common stock repurchases	(83	)	 	(51	)	
Dividends paid	(34	)	 	—	
 	
Other financing activities	19	
 	 	15	
 	
Net cash used in financing activities	(111	)	 	(145	)	
Net increase/(decrease) in cash and cash equivalents	(58	)	 	(65	)	
Cash and cash equivalents at beginning of year	80	
 	 	122	
 	
Cash and cash equivalents at end of the period	$	22	
 	 	$	57	

Supplemental disclosure:	 	

Cash paid during the period for:	 	 	 	
Interest (net of amount capitalized)	$	16	
 	 	$	21	
 	
Income taxes	93	
 	 	6	
 	
See accompanying notes to condensed consolidated financial statements.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2014, as well as the results of operations for the three and six months ended June 30, 2014 and 2013. The adjustments made were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three and six months ended June 30, 2014, are not necessarily indicative of operating results for the entire year.

Certain reclassifications, such as changes in our equity structure, have been made to prior year financial statements to conform with classifications used in the current year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):

June 30, 2014	Cost Basis	 	Unrealized
Gains	 	Unrealized Losses	 	Fair Value	
Cash	$	2	
 	 	$	—	
 	 	$	—	
 	 	$	2	
 	
Cash equivalents	20	
 	 	—	
 	 	—	
 	 	20	
 	
Cash and cash equivalents	22	
 	 	—	
 	 	—	
 	 	22	
 	
U.S. government and agency securities	289	
 	 	1	
 	 	(1	)	 	289	
 	
Foreign government bonds	17	
 	 	—	
 	 	—	
 	 	17	
 	
Asset-backed securities	186	
 	 	—	
 	 	—	
 	 	186	
 	
Mortgage-backed securities	171	
 	 	1	
 	 	(1	)	 	171	
 	
Corporate notes and bonds	794	
 	 	6	
 	 	—	
 	 	800	
 	
Municipal securities	25	
 	 	—	
 	 	—	
 	 	25	
 	
Marketable securities	1,482	
 	 	8	
 	 	(2	)	 	1,488	
 	
Total	$	1,504	
 	 	$	8	
 	 	$	(2	)	 	$	1,510	

9

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2013	Cost Basis	 	Unrealized
Gains	 	Unrealized Losses	 	Fair Value	
Cash	$	9	
 	 	$	—	
 	 	$	—	
 	 	$	9	
 	
Cash equivalents	71	
 	 	—	
 	 	—	
 	 	71	
 	
Cash and cash equivalents	80	
 	 	—	
 	 	—	
 	 	80	
 	
U.S. government and agency securities	295	
 	 	1	
 	 	(2	)	 	294	
 	
Foreign government bonds	11	
 	 	—	
 	 	—	
 	 	11	
 	
Asset-backed securities	146	
 	 	—	
 	 	—	
 	 	146	
 	
Mortgage-backed securities	144	
 	 	1	
 	 	(2	)	 	143	
 	
Corporate notes and bonds	628	
 	 	4	
 	 	(2	)	 	630	
 	
Municipal securities	26	
 	 	—	
 	 	—	
 	 	26	
 	
Marketable securities	1,250	
 	 	6	
 	 	(6	)	 	1,250	
 	
Total	$	1,330	
 	 	$	6	
 	 	$	(6	)	 	$	1,330	

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2014.

Activity for marketable securities (in millions):  

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	
Proceeds from sales and maturities	$	171	
 	 	$	226	
 	 	$	398	
 	 	$	465	
 	
Gross realized gains	1	
 	 	1	
 	 	2	
 	 	3	
 	
Gross realized losses	—	
 	 	—	
 	 	(1	)	 	(1	)	
 
Maturities for marketable securities (in millions):

June 30, 2014	Cost Basis	 	Fair Value	
Due in one year or less	$	205	
 	 	$	205	
 	
Due after one year through five years	1,270	
 	 	1,276	
 	
Due after five years through 10 years	7	
 	 	7	
 	
Total	$	1,482	
 	 	$	1,488	

NOTE 3. DERIVATIVE INSTRUMENTS

Fuel Hedge Contracts

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and historically entered into swap agreements for jet fuel refining margins. Effective in July 2014, the Company no longer enters into refining margin swap agreements.

As of June 30, 2014, the Company had outstanding fuel hedge contracts covering 245 million gallons of crude oil that will be settled from July 2014 to March 2016. Refer to the contractual obligations and commitments section of Item 2 for further information.

Interest Rate Swap Agreements

The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six Boeing 737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and

10

underlying notional values. The agreements expire from February 2020 through March 2021 to coincide with the lease termination dates.

Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):

 	June 30,
2014	 	December 31,
2013	
Derivative Instruments Not Designated as Hedges	 	 	 	
Fuel hedge contracts	 	 	 	
Fuel hedge contracts, current assets	$	15	
 	 	$	12	
 	
Fuel hedge contracts, noncurrent assets	2	
 	 	4	
 	
Fuel hedge contracts, current liabilities	(1	)	 	—	

Derivative Instruments Designated as Hedges	 	 	 	
Interest rate swaps	 	 	 	
Other accrued liabilities	(6	)	 	(7	)	
Other liabilities	(13	)	 	(10	)	
Losses in accumulated other comprehensive loss (AOCL)	(19	)	 	(17	)	

The net cash received (paid) for new positions and settlements was $1 million and $(9) million during the three months ended June 30, 2014 and 2013, respectively. The net cash received (paid) for new positions and settlements was $(6) million and $(9) million during the six months ended June 30, 2014 and 2013, respectively.

Pretax effect of derivative instruments on earnings (in millions):

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	
Derivative Instruments Not Designated as Hedges	 	 	 	 	 	 	 	
Fuel hedge contracts	 	 	 	 	 	 	 	
Gains (losses) recognized in aircraft fuel expense	$	5	
 	 	$	(25	)	 	$	(6	)	 	$	(49	)	
 	 	 	 	 	 	 	 	
Derivative Instruments Designated as Hedges	 	 	 	 	 	 	 	
Interest rate swaps	 	 	 	 	 	 	 	
Losses recognized in aircraft rent	(1	)	 	(2	)	 	(3	)	 	(3	)	
Gains (losses) recognized in other comprehensive income (OCI)	(2	)	 	7	
 	 	(5	)	 	10	

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. The amounts shown as recognized in OCI are prior to the losses recognized in the income statement as aircraft rent during the period. The Company expects $6 million to be reclassified from OCI to aircraft rent within the next twelve months.

Credit Risk and Collateral

The Company is exposed to credit losses in the event of nonperformance by counterparties to these derivative instruments. To mitigate exposure, the Company periodically evaluates the counterparties' potential risk of nonperformance by monitoring the absolute exposure levels and credit ratings. The Company maintains security agreements with a number of its counterparties which may require the Company to post collateral if the fair value of the selected derivative instruments fall below specified mark-to-market thresholds. The posted collateral does not offset the fair value of the derivative instruments and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet.

11

The Company posted collateral of $7 million and $7 million as of June 30, 2014 and December 31, 2013, respectively. The collateral was provided to one counterparty associated with the net liability position of the interest rate swap agreements, offset by the net asset position of the fuel hedge contracts under a master netting arrangement.

NOTE 4. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments on a Recurring Basis

Fair values of financial instruments on the consolidated balance sheet (in millions):

June 30, 2014	Level 1	 	Level 2	 	Total	
Assets	 	 	 	 	 	
Marketable securities	 	 	 	 	 	
U.S. government and agency securities	$	289	
 	 	$	—	
 	 	$	289	
 	
Foreign government bonds	—	
 	 	17	
 	 	17	
 	
Asset-backed securities	—	
 	 	186	
 	 	186	
 	
Mortgage-backed securities	—	
 	 	171	
 	 	171	
 	
Corporate notes and bonds	—	
 	 	800	
 	 	800	
 	
Municipal securities	—	
 	 	25	
 	 	25	
 	
Derivative instruments	 	 	 	 	 	
Fuel hedge call options	—	
 	 	17	
 	 	17	

Liabilities	 	 	 	 	 	
Derivative instruments	 	 	 	 	 	
Fuel hedge swaps	—	
 	 	(1	)	 	(1	)	
Interest rate swap agreements	—	
 	 	(19	)	 	(19	)	

 	
 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2013	Level 1	 	Level 2	 	Total	
Assets	 	 	 	 	 	
Marketable securities	 	 	 	 	 	
U.S. government and agency securities	$	294	
 	 	$	—	
 	 	$	294	
 	
Foreign government bonds	—	
 	 	11	
 	 	11	
 	
Asset-backed securities	—	
 	 	146	
 	 	146	
 	
Mortgage-backed securities	—	
 	 	143	
 	 	143	
 	
Corporate notes and bonds	—	
 	 	630	
 	 	630	
 	
Municipal securities	—	
 	 	26	
 	 	26	
 	
Derivative instruments	 	 	 	 	 	
Fuel hedge call options	—	
 	 	16	
 	 	16	

Liabilities	 	 	 	 	 	
Derivative instruments	 	 	 	 	 	
Fuel hedge swaps	—	
 	 	—	
 	 	—	
 	
Interest rate swap agreements	—	
 	 	(17	)	 	(17	)	

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on industry standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts that are not traded on a public exchange are Level 2 as the fair value is primarily based on inputs which are readily available in active markets or can be derived from information available in active markets. The fair value for call

12

options is determined utilizing an option pricing model based on inputs that are readily available in active markets, or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of nonperformance by counterparties. The fair value of jet fuel refining margins (fuel hedge contracts) is determined based on inputs readily available in public markets and provided by brokers who regularly trade these contracts. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based forward interest rates at period end, multiplied by the total notional value.

The Company has no financial assets that are measured at fair value on a nonrecurring basis at June 30, 2014.

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carried at amortized cost, which approximates fair value.

Debt: The carrying amount of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flow using borrowing rates for comparable debt over the weighted life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):

 	June 30,
2014	 	December 31,
2013	
Carrying amount	$	659	
 	 	$	703	
 	
Fair value	713	
 	 	762	

NOTE 5. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions):

 	June 30,
2014	 	December 31,
2013	
Current Liabilities:	 	 	 	
Other accrued liabilities	$	340	
 	 	$	314	
 	
Other Liabilities and Credits:	 	 	 	
Deferred revenue	333	
 	 	323	
 	
Other liabilities	20	
 	 	19	
 	
Total	$	693	
 	 	$	656	

Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	
Passenger revenues	$	62	
 	 	$	50	
 	 	$	118	
 	 	$	96	
 	
Other - net revenues	73	
 	 	56	
 	 	146	
 	 	110	
 	
Total	$	135	
 	 	$	106	
 	 	$	264	
 	 	$	206	

13

NOTE 6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):

 	June 30,
2014	 	December 31,
2013	
Fixed-rate notes payable due through 2024	$	660	
 	 	$	703	
 	
Variable-rate notes payable due through 2025	199	
 	 	168	
 	
Long-term debt	859	
 	 	871	
 	
Less current portion	114	
 	 	117	
 	
Total	$	745	
 	 	$	754	

Weighted-average fixed-interest rate	5.7	%	 	5.7	%	
Weighted-average variable-interest rate	1.6	%	 	1.7	%	

During the six months ended June 30, 2014, the Company made debt payments of $64 million. In addition, the company financed $51 million for the three Q400's that were delivered in Q4 2013.

At June 30, 2014, long-term debt principal payments for the next five years and thereafter are as follows (in millions):

 	Total	
Remainder of 2014	$	56	
 	
2015	117	
 	
2016	115	
 	
2017	121	
 	
2018	151	
 	
Thereafter	299	
 	
Total	$	859	

Bank Lines of Credit
 
The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in August 2015, is secured by aircraft. The other $100 million facility, which expires in March 2017, is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has no immediate plans to borrow using either of these facilities. These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at June 30, 2014.

NOTE 7. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized included the following components for the three months ended June 30, 2014 (in millions): 

 	Three Months Ended June 30,	
 	Qualified	 	Nonqualified	 	Postretirement Medical	
 	2014	 	2013	 	2014	 	2013	 	2014	 	2013	
Service cost	$	8	
 	 	$	12	
 	 	$	—	
 	 	$	1	
 	 	$	—	
 	 	$	1	
 	
Interest cost	20	
 	 	18	
 	 	1	
 	 	—	
 	 	1	
 	 	1	
 	
Expected return on assets	(29	)	 	(28	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	
Amortization of prior service cost	(1	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	
Recognized actuarial loss (gain)	4	
 	 	11	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	
Total	$	2	
 	 	$	13	
 	 	$	1	
 	 	$	1	
 	 	$	1	
 	 	$	2	

14

Net periodic benefit costs recognized included the following components for the six months ended June 30, 2014 (in millions): 

 	Six Months Ended June 30,	
 	Qualified	 	Nonqualified	 	Postretirement Medical	
 	2014	 	2013	 	2014	 	2013	 	2014	 	2013	
Service cost	16	
 	 	23	
 	 	—	
 	 	1	
 	 	1	
 	 	2	
 	
Interest cost	40	
 	 	36	
 	 	1	
 	 	1	
 	 	2	
 	 	2	
 	
Expected return on assets	(58	)	 	(55	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	
Amortization of prior service cost	(1	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	
Recognized actuarial loss	7	
 	 	21	
 	 	—	
 	 	—	
 	 	(1	)	 	—	
 	
Total	4	
 	 	25	
 	 	1	
 	 	2	
 	 	2	
 	 	4	

NOTE 8. COMMITMENTS

Future minimum fixed payments for commitments (in millions):

June 30, 2014	Aircraft Leases	 	Facility Leases	 	Aircraft Commitments	 	Capacity Purchase Agreements	 	Engine Maintenance	
Remainder of 2014	$	26	
 	 	$	47	
 	 	$	149	
 	 	$	25	
 	 	$	5	
 	
2015	103	
 	 	89	
 	 	423	
 	 	44	
 	 	10	
 	
2016	82	
 	 	86	
 	 	359	
 	 	32	
 	 	—	
 	
2017	52	
 	 	83	
 	 	382	
 	 	32	
 	 	—	
 	
2018	36	
 	 	36	
 	 	430	
 	 	14	
 	 	—	
 	
Thereafter	43	
 	 	211	
 	 	1,037	
 	 	—	
 	 	—	
 	
Total	$	342	
 	 	$	552	
 	 	$	2,780	
 	 	$	147	
 	 	$	15	

Lease Commitments

At June 30, 2014, the Company had lease contracts for 59 aircraft, which have remaining noncancelable lease terms ranging from 2014 to 2021. Of these aircraft, 16 are non-operating (i.e. not in the Company's fleet) and 14 are subleased to third-party carriers. The majority of airport and terminal facilities are also leased. Rent expense for aircraft and facility leases was $66 million and $83 million for the three months ended June 30, 2014 and 2013, respectively, and $141 million and $153 million for the six months ended June 30, 2014 and 2013, respectively.

Aircraft Commitments
 
As of June 30, 2014, the Company is committed to purchasing 66 B737 aircraft (29 737-900ER aircraft and 37 737 MAX aircraft), with deliveries in 2014 through 2022. In addition, the Company has options to purchase 58 additional B737 aircraft and seven Q400 aircraft.

Capacity Purchase Agreements (CPAs)
 
At June 30, 2014, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest Airlines, Inc. (SkyWest) to fly certain routes and Peninsula Airways, Inc. (PenAir) to fly one route in the state of Alaska. Under these agreements, Alaska pays the third-party carriers an amount which is based on a determination of their cost of operating those flights and other factors. The costs paid by Alaska to Horizon are based on similar data and are intended to approximate market rates for those services. Future payments (excluding those due to Horizon) are based on contractually required minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights, such as fuel.

15

Engine Maintenance
 
The Company has a power-by-the-hour (PBH) maintenance agreement for some of the engines equipped on 737-700 and 737-900 aircraft. This agreement transfers risk to a third-party service provider and fixes the amount the Company pays per flight hour in exchange for maintenance and repairs under a predefined maintenance program. Future payments are based on minimum flight hours.

NOTE 9. SHAREHOLDERS' EQUITY

Common Stock Changes

During the second quarter of 2014, shareholders voted to increase the number of authorized shares from 100 million to 200 million shares, reduce the par value of common stock from $1 per share to $0.01 per share, and the Board of Directors declared a two-for-one stock split by means of a stock distribution. The additional shares were distributed on July 9, 2014, to the shareholders of record on June 23, 2014. The stock split increased the Company's outstanding shares from approximately 68.4 million shares to 136.7 million shares as of June 30, 2014. All historical share and per share information has been recast to reflect the changes in the Company's equity structure.

Dividends

During the three months ended June 30, 2014, the Company declared and paid a cash dividend of $0.125 per share, or $17 million. During the six months ended June 30, 2014, the Company declared and paid cash dividends of $0.250 per share, or $34 million.

Common Stock Repurchase

In September 2012, the Board of Directors authorized a $250 million share repurchase program, which was completed in July 2014. In May 2014, the Board of Directors authorized a $650 million share repurchase program, which began immediately after the $250 million program was completed.
Share repurchase activity (in millions, except share amounts):

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	
 	Shares	 	Amount	 	Shares	 	Amount	 	Shares	 	Amount	 	Shares	 	Amount	
2012 Repurchase Program - $250 million	1,108,334	
 	 	$	53	
 	 	1,089,194	
 	 	$	32	
 	 	1,814,036	
 	 	$	83	
 	 	1,835,564	
 	 	$	51	

Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive income (loss), net of tax (in millions):

 	June 30,
2014	 	December 31,
2013	
Marketable securities	$	4	
 	 	$	—	
 	
Employee benefit plans	(170	)	 	(173	)	
Interest rate derivatives	(12	)	 	(10	)	
Total	$	(178	)	 	$	(183	)	

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and six months ended June 30, 2014 and 2013, anti-dilutive shares excluded from the calculation of EPS were not material.

16

NOTE 10. OPERATING SEGMENT INFORMATION
 
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly one route in the state of Alaska. The Company attributes revenue between Mainline and Regional based on the coupon fare in effect on the date of issuance relative to the origin and destination of each flight segment. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments.
Alaska Mainline - Flying Boeing 737 jets and all associated revenues and costs.
Alaska Regional - Alaska's CPAs with Horizon, SkyWest and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective CPAs. Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska on behalf of Horizon.
Horizon - Horizon operates turboprop Q400 aircraft. All of Horizon's capacity is sold to Alaska under a CPA.  Expenses include those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs. The results of Horizon's operations are eliminated upon consolidation.
Additionally, the following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resource allocations. Adjustments are further explained below in reconciling to consolidated GAAP results. Operating segment information is as follows (in millions):

 	Three Months Ended June 30, 2014	
 	Alaska	 	 	 	 	 	 	 	 	 	 	
 	Mainline	 	Regional	 	Horizon	 	Consolidating	 	Air Group Adjusted (a)	 	Special Items (b)	 	Consolidated	
Operating revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	
Passenger	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mainline	$	974	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	974	
 	 	$	—	
 	 	$	974	
 	
Regional	—	
 	 	200	
 	 	—	
 	 	—	
 	 	200	
 	 	—	
 	 	200	
 	
Total passenger revenues	974	
 	 	200	
 	 	—	
 	 	—	
 	 	1,174	
 	 	—	
 	 	1,174	
 	
CPA revenues	—	
 	 	—	
 	 	87	
 	 	(87	)	 	—	
 	 	—	
 	 	—	
 	
Freight and mail	31	
 	 	1	
 	 	—	
 	 	—	
 	 	32	
 	 	—	
 	 	32	
 	
Other - net	147	
 	 	20	
 	 	2	
 	 	—	
 	 	169	
 	 	—	
 	 	169	
 	
Total operating revenues	1,152	
 	 	221	
 	 	89	
 	 	(87	)	 	1,375	
 	 	—	
 	 	1,375	

Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding fuel	602	
 	 	151	
 	 	86	
 	 	(87	)	 	752	
 	 	—	
 	 	752	
 	
Economic fuel	324	
 	 	49	
 	 	—	
 	 	—	
 	 	373	
 	 	(13	)	 	360	
 	
Total operating expenses	926	
 	 	200	
 	 	86	
 	 	(87	)	 	1,125	
 	 	(13	)	 	1,112	

Nonoperating income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	5	
 	 	—	
 	 	—	
 	 	—	
 	 	5	
 	 	—	
 	 	5	
 	
Interest expense	(9	)	 	(1	)	 	(2	)	 	—	
 	 	(12	)	 	—	
 	 	(12	)	
Other	9	
 	 	1	
 	 	(1	)	 	—	
 	 	9	
 	 	—	
 	 	9	
 	
 	5	
 	 	—	
 	 	(3	)	 	—	
 	 	2	
 	 	—	
 	 	2	
 	
Income (loss) before income tax	$	231	
 	 	$	21	
 	 	$	—	
 	 	$	—	
 	 	$	252	
 	 	$	13	
 	 	$	265	

17

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended June 30, 2013	
 	Alaska	 	 	 	 	 	 	 	 	 	 	
 	Mainline	 	Regional	 	Horizon	 	Consolidating	 	Air Group Adjusted (a)	 	Special Items (b)	 	Consolidated	
Operating revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	
Passenger	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mainline	$	896	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	896	
 	 	$	—	
 	 	$	896	
 	
Regional	—	
 	 	192	
 	 	—	
 	 	—	
 	 	192	
 	 	—	
 	 	192	
 	
Total passenger revenues	896	
 	 	192	
 	 	—	
 	 	—	
 	 	1,088	
 	 	—	
 	 	1,088	
 	
CPA revenues	—	
 	 	—	
 	 	91	
 	 	(91	)	 	—	
 	 	—	
 	 	—	
 	
Freight and mail	29	
 	 	1	
 	 	—	
 	 	—	
 	 	30	
 	 	—	
 	 	30	
 	
Other - net	120	
 	 	16	
 	 	2	
 	 	—	
 	 	138	
 	 	—	
 	 	138	
 	
Total operating revenues	1,045	
 	 	209	
 	 	93	
 	 	(91	)	 	1,256	
 	 	—	
 	 	1,256	

Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding fuel	569	
 	 	149	
 	 	84	
 	 	(92	)	 	710	
 	 	—	
 	 	710	
 	
Economic fuel	327	
 	 	44	
 	 	—	
 	 	—	
 	 	371	
 	 	1	
 	 	372	
 	
Total operating expenses	896	
 	 	193	
 	 	84	
 	 	(92	)	 	1,081	
 	 	1	
 	 	1,082	

Nonoperating income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	4	
 	 	—	
 	 	—	
 	 	—	
 	 	4	
 	 	—	
 	 	4	
 	
Interest expense	(9	)	 	—	
 	 	(4	)	 	(1	)	 	(14	)	 	—	
 	 	(14	)	
Other	6	
 	 	(1	)	 	1	
 	 	(1	)	 	5	
 	 	—	
 	 	5	
 	
 	1	
 	 	(1	)	 	(3	)	 	(2	)	 	(5	)	 	—	
 	 	(5	)	
Income (loss) before income tax	$	150	
 	 	$	15	
 	 	$	6	
 	 	$	(1	)	 	$	170	
 	 	$	(1	)	 	$	169	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six Months Ended June 30, 2014	
 	Alaska	 	 	 	 	 	 	 	 	 	 	
 	Mainline	 	Regional	 	Horizon	 	Consolidating	 	Air Group Adjusted (a)	 	Special Items (b)	 	Consolidated	
Operating revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	
Passenger	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mainline	$	1,828	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	1,828	
 	 	$	—	
 	 	$	1,828	
 	
Regional	—	
 	 	386	
 	 	—	
 	 	—	
 	 	386	
 	 	—	
 	 	386	
 	
Total passenger revenues	1,828	
 	 	386	
 	 	—	
 	 	—	
 	 	2,214	
 	 	—	
 	 	2,214	
 	
CPA revenues	—	
 	 	—	
 	 	178	
 	 	(178	)	 	—	
 	 	—	
 	 	—	
 	
Freight and mail	54	
 	 	2	
 	 	—	
 	 	—	
 	 	56	
 	 	—	
 	 	56	
 	
Other - net	287	
 	 	37	
 	 	3	
 	 	—	
 	 	327	
 	 	—	
 	 	327	
 	
Total operating revenues	2,169	
 	 	425	
 	 	181	
 	 	(178	)	 	2,597	
 	 	—	
 	 	2,597	

Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding fuel	1,178	
 	 	302	
 	 	172	
 	 	(178	)	 	1,474	
 	 	—	
 	 	1,474	
 	
Economic fuel	642	
 	 	97	
 	 	—	
 	 	—	
 	 	739	
 	 	(21	)	 	718	
 	
Total operating expenses	1,820	
 	 	399	
 	 	172	
 	 	(178	)	 	2,213	
 	 	(21	)	 	2,192	

Nonoperating income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	10	
 	 	—	
 	 	—	
 	 	—	
 	 	10	
 	 	—	
 	 	10	
 	
Interest expense	(17	)	 	(1	)	 	(6	)	 	(1	)	 	(25	)	 	—	
 	 	(25	)	
Other	27	
 	 	—	
 	 	—	
 	 	—	
 	 	27	
 	 	—	
 	 	27	
 	
 	20	
 	 	(1	)	 	(6	)	 	(1	)	 	12	
 	 	—	
 	 	12	
 	
Income (loss) before income tax	$	369	
 	 	$	25	
 	 	$	3	
 	 	$	(1	)	 	$	396	
 	 	$	21	
 	 	$	417	

18

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six Months Ended June 30, 2013	
 	Alaska	 	 	 	 	 	 	 	 	 	 	
 	Mainline	 	Regional	 	Horizon	 	Consolidating	 	Air Group Adjusted (a)	 	Special Items (b)	 	Consolidated	
Operating revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	
Passenger	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mainline	$	1,692	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	1,692	
 	 	$	—	
 	 	$	1,692	
 	
Regional	—	
 	 	374	
 	 	—	
 	 	—	
 	 	374	
 	 	—	
 	 	374	
 	
Total passenger revenues	1,692	
 	 	374	
 	 	—	
 	 	—	
 	 	2,066	
 	 	—	
 	 	2,066	
 	
CPA revenues	—	
 	 	—	
 	 	186	
 	 	(186	)	 	—	
 	 	—	
 	 	—	
 	
Freight and mail	54	
 	 	2	
 	 	—	
 	 	—	
 	 	56	
 	 	—	
 	 	56	
 	
Other - net	234	
 	 	31	
 	 	3	
 	 	—	
 	 	268	
 	 	—	
 	 	268	
 	
Total operating revenues	1,980	
 	 	407	
 	 	189	
 	 	(186	)	 	2,390	
 	 	—	
 	 	2,390	

Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding fuel	1,116	
 	 	296	
 	 	173	
 	 	(187	)	 	1,398	
 	 	—	
 	 	1,398	
 	
Economic fuel	650	
 	 	90	
 	 	—	
 	 	—	
 	 	740	
 	 	13	
 	 	753	
 	
Total operating expenses	1,766	
 	 	386	
 	 	173	
 	 	(187	)	 	2,138	
 	 	13	
 	 	2,151	

Nonoperating income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	9	
 	 	—	
 	 	—	
 	 	—	
 	 	9	
 	 	—	
 	 	9	
 	
Interest expense	(21	)	 	—	
 	 	(7	)	 	(1	)	 	(29	)	 	—	
 	 	(29	)	
Other	11	
 	 	(1	)	 	1	
 	 	(1	)	 	10	
 	 	—	
 	 	10	
 	
 	(1	)	 	(1	)	 	(6	)	 	(2	)	 	(10	)	 	—	
 	 	(10	)	
Income (loss) before income tax	$	213	
 	 	$	20	
 	 	$	10	
 	 	$	(1	)	 	$	242	
 	 	$	(13	)	 	$	229	

(a) 	The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain charges.	
 	 	
(b) 	Includes mark-to-market fuel-hedge accounting charges.	

Total assets were as follows (in millions):

 	June 30,
2014	 	December 31,
2013	
Alaska(a)	$	6,473	
 	 	$	5,832	
 	
Horizon	857	
 	 	840	
 	
Parent company	3,124	
 	 	2,762	
 	
Elimination of inter-company accounts	(4,140	)	 	(3,596	)	
Consolidated	$	6,314	
 	 	$	5,838	

(a) 	There are no assets associated with purchased capacity flying at Alaska.	

19

 	
 	
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
 
OVERVIEW
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company, our segment operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013. This overview summarizes the MD&A, which includes the following sections:

•	Second Quarter Review—highlights from the second quarter of 2014 outlining some of the major events that happened during the period and how they affected our financial performance.	

•	Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and six months ended June 30, 2014. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line-item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2014. 	

•	Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.	

SECOND QUARTER REVIEW

Our consolidated pretax income was $265 million during the second quarter of 2014, compared to $169 million in the second quarter of 2013. The increase of $96 million was mainly due to increased revenues of $119 million, lower aircraft fuel expense of $12 million, and non-operating income of $2 million in the current period compared to non-operating expense of $5 million in the prior period. These improvements were partially offset by increased non-fuel operating expenses of $42 million.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Accomplishments and Highlights
 	 	
•	Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2014 by J.D. Power for the seventh year in a row.	
 	 	
•	Ranked highest by frequent fliers in the J.D. Power's first-ever Airline Loyalty/Rewards Program Satisfaction Report.	
 	 	
•	Named No. 1 on-time carrier in North America for the fourth year in a row from FlightStats in February 2014.	
 	 	
•	Received Airline Business Magazine's 2014 Airline Strategy Award for Technology, Environment and Operations.	

Operations Performance

During the second quarter, both Alaska and Horizon continued their strong on-time performance, reporting that 88.5% and 93.1% of their flights arrived on time, respectively. For the twelve months ended May 2014, Alaska maintained its ranking as the top carrier among the eight largest U.S. airlines for on-time performance, according to the U.S. Department of Transportation.

Update on Labor Negotiations

In April 2014, Alaska Airlines' clerical, office, and passenger service employees (COPS), represented by the International Association of Machinist and Aerospace Workers (IAM), ratified a new five-year contract.

In April 2014, Horizon Air's dispatchers, represented by the Transport Workers Union (TWU), ratified a new four-year contract.

20

In June 2014, Horizon Air's aircraft technicians and fleet service agents, represented by the International Brotherhood of Teamsters (IBT), ratified a new six-year contract.

Alaska remains in negotiations with its flight attendants, represented by the Association of Flight Attendants (AFA), under the oversight of the National Mediation Board. The contract first became amendable in May 2012 and the parties have been in mediation since July 2013. Under the Railway Labor Act, contracts between airlines and their employees do not expire, but rather become amendable.

New Markets

New routes launched and announced in the second quarter are as follows:

New Non-Stop Routes Launched in Q2	New Non-Stop Routes Announced in Q2 (Launch Dates)	
Salt Lake City to Portland, Oregon	Seattle to Baltimore (9/2/2014)	
Salt Lake City to San Diego	Seattle to Albuquerque, New Mexico (9/18/2014)	
Salt Lake City to Los Angeles	Portland to Los Cabos, Mexico (11/3/2014)*	
Salt Lake City to San Jose, California	Portland to Puerto Vallarta (11/4/2014)*	
Salt Lake City to Boise, Idaho	Seattle to Cancun (11/6/2014)	
Salt Lake City to Las Vegas	 	
Salt Lake City to San Francisco	 	
Portland to Kalispell, Montana	 	
Seattle to New Orleans	 	
Seattle to Tampa, Florida	 	
 	 	
* 	Subject to government approval.	

Capital Allocation

During the second quarter of 2014, we paid cash dividends of $17 million and we repurchased 1,108,334 shares of our common stock for $53 million under the $250 million repurchase program authorized by our Board of Directors in September 2012. In May 2014, the Board of Directors authorized a $650 million share repurchase program, which began in July 2014 immediately after the existing $250 million program was completed. Since 2007, we have repurchased 44 million shares of common stock under such programs for $487 million for an average price of $11 per share. During the month of July, we repurchased 1,878,975 shares of our common stock for $87 million, resulting in 134,882,465 shares outstanding at July 31, 2014. For 2014, we expect to deploy at least $350 million through a combination of dividends and share repurchases.

Outlook

We expect our capacity to increase ~ 8% in the third quarter and increase ~ 11% in the fourth quarter. In addition to our own capacity growth, competitive capacity is expected to be up ~ 9% in the third quarter and ~ 12% in the fourth quarter (weighted by the concentration of our own capacity in competitive markets), which will put pressure on our yields and load factors. Furthermore, we have made changes to our network to increase the markets served out of Seattle and to redeploy capacity in order to better match demand and optimize revenue. We believe we are well positioned to compete against these competitive incursions because of our low cost structure, award-winning service, and loyal customer base, among other things. We currently expect our unit costs to be higher in the third quarter compared to 2013, but we are now targeting a ~ 0.5% decrease in unit costs for the full year of 2014 compared to 2013.

21

Our current expectations for capacity and CASM excluding fuel and special items are summarized below:

 	Forecast
Q3 2014	 	Change
Y-O-Y	 	Forecast
Full Year 2014	 	Change
Y-O-Y	
Consolidated:	 	 	 	 	 	 	 	
ASMs (000,000) "capacity"	9,550 - 9,600	 	~ 8.0%	 	36,050 - 36,150	 	~ 7.0%	
CASM excluding fuel (cents)	8.23¢ - 8.28¢	 	~ 1.0%	 	8.42¢ - 8.45¢	 	~ (0.5)%	
 	 	 	 	 	 	 	 	
Mainline:	 	 	 	 	 	 	 	
ASMs (000,000) "capacity"	8,575 - 8,625	 	~ 7.0%	 	32,400 - 32,500	 	~ 6.5%	
CASM excluding fuel (cents)	7.42¢ - 7.47¢	 	~ 1.5%	 	7.52¢ - 7.55¢	 	~ flat	

RESULTSOF OPERATIONS
 
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THREE MONTHS ENDED JUNE 30, 2013 

Our consolidated net income for the second quarter of 2014 was $165 million, or $1.19 per diluted share, compared to net income of $104 million, or $0.74 per diluted share, in the second quarter of 2013. Significant items impacting the comparability between the periods are as follows:
 	 	
•	Both periods include adjustments to reflect the timing of unrealized mark-to-market adjustments related to our fuel hedge positions. For the second quarter of 2014, we recognized mark-to-market unrealized gains of $13 million ($8 million after tax, or $0.06 per diluted share) compared to unrealized losses of $1 million ($1 million after tax, or $0.00 per diluted share) in the second quarter of 2013.	

ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of mark-to-market gains or losses or other individual revenues or expenses is useful information to investors because:
 	 	
•	We believe it is the basis by which we are evaluated by industry analysts;	

•	By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of our non-fuel continuing operations.  Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management;	

•	CASM excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance;	

•	Our results excluding fuel expense and certain special items serve as the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our consolidated statements of operations; and	

•	It is useful to monitor performance without these items as it improves a reader’s ability to compare our results to those of other airlines.	

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude these amounts are non-recurring, infrequent, or unusual in nature.

22

Excluding the impact of mark-to-market fuel hedge adjustments, our adjusted consolidated net income for the second quarter of 2014 was $157 million, or $1.13 per diluted share, compared to an adjusted consolidated net income of $105 million, or $0.74 per diluted share, in the second quarter of 2013.

 	Three Months Ended June 30,	
 	2014	 	2013	
(in millions, except per share amounts)	Dollars	 	Diluted EPS	 	Dollars	 	Diluted EPS	
Net income and diluted EPS as reported	$	165	
 	 	$	1.19	
 	 	$	104	
 	 	$	0.74	
 	
Mark-to-market fuel hedge adjustments, net of tax	(8	)	 	(0.06	)	 	1	
 	 	—	
 	
Non-GAAP adjusted income and per-share amounts	$	157	
 	 	$	1.13	
 	 	$	105	
 	 	$	0.74	

Our operating costs per ASM are summarized below:

 	Three Months Ended June 30,	
(in cents)	2014	 	2013	 	% Change	
Consolidated:	 	 	 	 	 	
CASM	
 	12.37	¢	 	
 	12.66	¢	 	(2.3	)	
Less the following components:	 	 	 	

Aircraft fuel, including hedging gains and losses	4.01	
 	 	4.35	
 	 	(7.8	)	
CASM excluding fuel	
 	8.36	¢	 	
 	8.31	¢	 	0.6	

Mainline:	 	 	 	 	 	
CASM	
 	11.28	¢	 	
 	11.58	¢	 	(2.6	)	
Less the following components:	 	 	 	

Aircraft fuel, including hedging gains and losses	3.84	
 	 	4.23	
 	 	(9.2	)	
CASM excluding fuel	
 	7.44	¢	 	
 	7.35	¢	 	1.2	

23

OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.

Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.

 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2014	 	2013	 	Change	 	2014	 	2013	 	Change	
Consolidated Operating Statistics:(a)	 	 	 	 	 	 	 	 	 	 	 	
Revenue passengers (000)	7,353	 	6,980	 	5.3%	 	14,002	 	13,326	 	5.1%	
Revenue passenger miles (RPM) (000,000) "traffic"	7,755	 	7,385	 	5.0%	 	14,832	 	14,181	 	4.6%	
Available seat miles (ASM) (000,000) "capacity"	8,988	 	8,547	 	5.2%	 	17,341	 	16,530	 	4.9%	
Load factor	86.3%	 	86.4%	 	(0.1) pts	 	85.5%	 	85.8%	 	(0.3) pts	
Yield	15.14¢	 	14.73¢	 	2.8%	 	14.93¢	 	14.56¢	 	2.5%	
Passenger revenue per ASM (PRASM)	13.06¢	 	12.73¢	 	2.6%	 	12.77¢	 	12.49¢	 	2.2%	
Revenue per ASM (RASM)	15.29¢	 	14.70¢	 	4.0%	 	14.98¢	 	14.46¢	 	3.6%	
Operating expense per ASM (CASM) excluding fuel (b)	8.36¢	 	8.31¢	 	0.6%	 	8.50¢	 	8.46¢	 	0.5%	
Economic fuel cost per gallon(b)	$3.20	 	$3.28	 	(2.4%)	 	$3.26	 	$3.38	 	(3.6%)	
Fuel gallons (000,000)	116	 	113	 	2.7%	 	227	 	219	 	3.7%	
ASMs per fuel gallons	77.5	 	75.6	 	2.5%	 	76.4	 	75.5	 	1.2%	
Average number of full-time equivalent employees (FTEs)	12,515	 	12,059	 	3.8%	 	12,451	 	12,036	 	3.4%	
 	 	 	 	 	 	 	 	 	 	 	 	
Mainline Operating Statistics:	 	 	 	 	 	 	 	 	 	 	 	
Revenue passengers (000)	5,307	 	5,074	 	4.6%	 	10,044	 	9,608	 	4.5%	
RPMs (000,000) "traffic"	7,029	 	6,729	 	4.5%	 	13,431	 	12,901	 	4.1%	
ASMs (000,000) "capacity"	8,095	 	7,743	 	4.5%	 	15,590	 	14,946	 	4.3%	
Load factor	86.8%	 	86.9%	 	(0.1) pts	 	86.2%	 	86.3%	 	(0.1) pts	
Yield	13.86¢	 	13.31¢	 	4.1%	 	13.61¢	 	13.11¢	 	3.8%	
PRASM	12.03¢	 	11.57¢	 	4.0%	 	11.73¢	 	11.32¢	 	3.6%	
RASM	14.24¢	 	13.50¢	 	5.5%	 	13.92¢	 	13.24¢	 	5.1%	
CASM excluding fuel(b)	7.44¢	 	7.35¢	 	1.2%	 	7.56¢	 	7.47¢	 	1.2%	
Economic fuel cost per gallon(b)	$3.19	 	$3.28	 	(2.7%)	 	$3.25	 	$3.37	 	(3.6%)	
Fuel gallons (000,000)	102	 	100	 	2.0%	 	197	 	193	 	2.1%	
Average number of FTEs	9,767	 	9,457	 	3.3%	 	9,679	 	9,404	 	2.9%	
Aircraft utilization	10.5	 	10.9	 	(3.7%)	 	10.4	 	10.7	 	(2.8%)	
Average aircraft stage length	1,181	 	1,156	 	2.2%	 	1,190	 	1,188	 	0.2%	
Mainline operating fleet at period-end	134	 	128	 	6 a/c	 	134	 	128	 	6 a/c	
 	 	 	 	 	 	 	 	 	 	 	 	
Regional Operating Statistics:(c)	 	 	 	 	 	 	 	 	 	 	 	
Revenue passengers (000)	2,046	 	1,907	 	7.3%	 	3,958	 	3,718	 	6.5%	
RPMs (000,000) "traffic"	725	 	656	 	10.5%	 	1,401	 	1,280	 	9.5%	
ASMs (000,000) "capacity"	894	 	804	 	11.2%	 	1,751	 	1,584	 	10.5%	
Load factor	81.2%	 	81.6%	 	(0.4 pts)	 	80.0%	 	80.8%	 	(0.8 pts)	
Yield	27.55¢	 	29.29¢	 	(5.9%)	 	27.54¢	 	29.19¢	 	(5.7%)	
PRASM	22.37¢	 	23.91¢	 	(6.4%)	 	22.04¢	 	23.60¢	 	(6.6%)	
Operating fleet (Horizon only)	51	 	48	 	3 a/c	 	51	 	48	 	3 a/c	
 	 	
(a) 	Except for FTEs, data includes information related to third-party Regional CPA arrangements.	
 	 	
(b) 	See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section.	
 	 	
(c) 	Data presented includes information related to Regional CPAs.	

24

OPERATING REVENUES

Total operating revenues increased $119 million, or 9%, during the second quarter of 2014 compared to the same period in 2013. The changes are summarized in the following table:

 	Three Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Passenger	 	 	 	 	 	
Mainline	$	974	
 	 	$	896	
 	 	9	
Regional	200	
 	 	192	
 	 	4	
Total passenger revenue	1,174	
 	 	1,088	
 	 	8	
Freight and mail	32	
 	 	30	
 	 	7	
Other - net	169	
 	 	138	
 	 	22	
Total operating revenues	$	1,375	
 	 	$	1,256	
 	 	9	

Passenger Revenue – Mainline

Mainline passenger revenue for the second quarter of 2014 increased by 9% due to a 4.5% increase in capacity and a 4.0% increase in PRASM compared to 2013. The increase in capacity was driven by the annualization of new routes added to expand our service in Seattle, Anchorage, and Portland. The increase in PRASM was driven by a 4.1% increase in ticket yield partially offset by a 0.1 point decrease in load factor compared to the prior-year quarter. Yields increased due to reallocation of capacity to markets with stronger demand and by a change in revenue allocation between Mainline and Regional service because of certain industry pricing changes. Without the industry change, Mainline yields would have increased by 2.9%.

Passenger Revenue – Regional

Regional passenger revenue increased by $8 million, or 4%, compared to the second quarter of 2013, due to an 11.2% increase in capacity, partially offset by a 6.4% decrease in PRASM. The increase in capacity was driven by the annualization of new routes, and to a lesser extent, by five new routes launched this quarter. The decrease in PRASM is due to a 5.9% decline in yield, and a decrease in load factor of 0.4 points. The decline in yield was driven mostly by a change in revenue allocation between Mainline and Regional service because of certain industry pricing changes. Without the revenue allocation adjustment yield would have decreased 1.8%. Additionally, the average trip length for our Regional flights increased 3.5%, which also puts downward pressure on yields.

Other – Net

Other - net revenue increased $31 million, or 22%, from the second quarter of 2013. Mileage plan revenue increased $17 million compared to the second quarter of 2013, due to an 11% increase in miles sold, and an 8% increase in cash received per mile, and an increase in the percentage of cash proceeds allocated to the marketing deliverables under the affinity card agreement, which was modified in July 2013. Additionally, bags fees and ticket change fees are up 21% and 11%, respectively, due to changes in our fee structure that took effect in November 2013.

OPERATING EXPENSES

Total operating expenses increased $30 million, or 3%, compared to the second quarter of 2013. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

 	Three Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Fuel expense	$	360	
 	 	$	372	
 	 	(3	)	
Non-fuel expenses	752	
 	 	710	
 	 	6	
 	
Total Operating Expenses	$	1,112	
 	 	$	1,082	
 	 	3	

Significant operating expense variances from 2013 are more fully described below.

25

Wages and Benefits

Wages and benefits increased during the second quarter of 2014 by $23 million.  The primary components of wages and benefits are shown in the following table:

 	Three Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Wages	$	211	
 	 	$	187	
 	 	13	
 	
Pension - Defined benefit plans	2	
 	 	12	
 	 	(83	)	
Defined contribution plans	13	
 	 	11	
 	 	18	
 	
Medical and other benefits	39	
 	 	34	
 	 	15	
 	
Payroll taxes	16	
 	 	14	
 	 	14	
 	
Total wages and benefits	$	281	
 	 	$	258	
 	 	9	

Wages increased 13% with a 3.8% increase in FTEs. The primary driver of the increase in wages was annualization of new labor contracts that included higher rates. FTEs increased across most work groups compared to the prior year due to flight activity growth. Additionally, late last year we started replacing many of our contractors in our Information Technology group with employees.

Pension expense decreased 83%, compared to the same period in the prior year. The decline is largely due to the improved funded status of the plan and the freezing of plan benefits for our non-union employees beginning January 1, 2014.

Medical and other benefits increased approximately 15%, primarily due to increased workers compensation activity and rates.

Variable Incentive Pay

Variable incentive pay increased $8 million, or 38% compared to 2013. With our year-to-date results, we are exceeding our incentive plan financial goals by more than we were at this time last year.

Aircraft Fuel

Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases. Our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease.  Raw fuel expense  is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S.   Raw fuel expense  approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense decreased $12 million, or 3% compared to 2013. The elements of the change are illustrated in the following table: 

 	Three Months Ended June 30,	
 	2014	 	2013	
(in millions, except for per gallon amounts)	Dollars	 	Cost/Gal	 	Dollars	 	Cost/Gal	
Raw or "into-plane" fuel cost	$	365	
 	 	$	3.13	
 	 	$	347	
 	 	$	3.07	
 	
(Gains) losses on settled hedges	8	
 	 	0.07	
 	 	24	
 	 	0.21	
 	
Consolidated economic fuel expense	373	
 	 	3.20	
 	 	371	
 	 	3.28	
 	
Mark-to-market fuel hedge adjustments	(13	)	 	(0.11	)	 	1	
 	 	0.01	
 	
GAAP fuel expense	$	360	
 	 	$	3.09	
 	 	$	372	
 	 	$	3.29	
 	
Fuel gallons	116	
 	 	 	 	113	

The raw fuel price per gallon increased 2.0% as a result of higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the second quarter of 2014 was due to higher crude oil prices of 9.4%, partially

26

offset by a 6.9% decrease in refining margins, as compared to the prior year. Additionally in the second quarter of 2014, we received a refund of certain fuel taxes paid between 2010 and 2014. This refund reduced our cost of fuel by $0.05/gallon in the second quarter of 2014.
 
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms.  We believe this is the best measure of the effect that fuel prices are currently having on our business because it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

We recognized losses of $8 million for hedges that settled during the second quarter of 2014, compared to losses of $24 million in 2013.  These amounts represent the net cash paid including the premium expense recognized for those hedges.

Aircraft Maintenance

Aircraft maintenance expense decreased by $10 million, or 15%, compared to the second quarter of 2013. The decrease is primarily due to a reduction in the number of engines covered by power-by-the-hour (PBH) contracts in the prior year, along with reduced flying on the engines that are still under the remaining PBH contract. Additionally, Horizon had fewer scheduled and unscheduled engine events in the current period compared to the prior period. Partially offsetting the decreases were increased rates and volumes for B737 engines that are not covered under the PBH contract and higher component costs.

Landing Fees and Other Rentals

Landing fees and other rentals decreased $11 million, or 15%, compared to the second quarter of 2013. In the prior-year quarter, we recorded the higher rates at SeaTac International Airport that had been imposed on airlines during the time we were in negotiation for a new lease. As a result of these imposed rate increases that were retroactive to January 2013, we recorded an additional $6 million related to the first quarter of 2013 in the prior-year quarter. As the rates on the actual signed lease were lower than the imposed rates accrued in the prior year, we received a reimbursement from the Port of Seattle for overpayment of rents, landing fees, and revenue sharing of approximately $9 million in the current quarter. Partially offsetting the impact of items relating to the Port of Seattle were increased volumes and higher rates at other airports throughout the network.

Contracted Services

Contracted services expense increased $8 million, or 15% , compared to the second quarter of 2013. The increase is primarily due to an increase in CPA flying by SkyWest, as well as higher passenger and ramp handling costs to support increased activity.

Other Operating Expenses

Other operating expenses increased $16 million, or 25%, compared to the second quarter of 2013. The increase is largely due to additional professional services, software licenses, and property taxes. The additional professional services and software licenses are due to system modernization initiatives, while the increase in property taxes are due in part to our increased capital investments.

NONOPERATING INCOME (EXPENSE)

In the current quarter, we generated nonoperating income of $2 million compared to an expense of $5 million in the prior-year period. In the current quarter, we recognized a gain from the sale of stock received in connection with a bankruptcy claim. Additionally, our interest expense was $2 million lower due to lower average debt levels.

27

We are presenting our line-item expenses below both in absolute dollars and on an ASM basis to highlight areas in which costs have increased or decreased either more or less than capacity.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	 	Change	
(in millions, except CASM)	Amount	 	Amount	 	CASM	 	CASM	 	CASM	
Wages and benefits	$	281	
 	 	$	258	
 	 	
 	3.13	¢	 	
 	3.02	¢	 	3.6	 %	
Variable incentive pay	29	
 	 	21	
 	 	0.32	
 	 	0.25	
 	 	28.0	 %	
Aircraft maintenance	57	
 	 	67	
 	 	0.63	
 	 	0.78	
 	 	(19.2	)%	
Aircraft rent	29	
 	 	30	
 	 	0.32	
 	 	0.35	
 	 	(8.6	)%	
Landing fees and other rentals	64	
 	 	75	
 	 	0.71	
 	 	0.88	
 	 	(19.3	)%	
Contracted services	62	
 	 	54	
 	 	0.69	
 	 	0.63	
 	 	9.5	 %	
Selling expenses	53	
 	 	51	
 	 	0.59	
 	 	0.60	
 	 	(1.7	)%	
Depreciation and amortization	73	
 	 	68	
 	 	0.81	
 	 	0.80	
 	 	1.3	 %	
Food and beverage service	23	
 	 	21	
 	 	0.26	
 	 	0.25	
 	 	4.0	 %	
Other	81	
 	 	65	
 	 	0.91	
 	 	0.75	
 	 	21.3	 %	
Non-fuel Expenses	$	752	
 	 	$	710	
 	 	
 	8.37	¢	 	
 	8.31	¢	 	0.7	 %	

Additional Segment Information

Refer to the Notes of the Condensed Consolidated Financial Statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Alaska Mainline

Pretax profit for Alaska Mainline was $231 million in the second quarter of 2014 compared to $150 million in the second quarter of 2013. The $78 million increase in Mainline passenger revenue is described above. Mainline operating expense excluding fuel increased by $33 million to $602 million in 2014 driven mainly by increased wages and incentive pay as we are exceeding our goals by more in the current year compared to the prior year, and increased spending on IT infrastructure projects. These increases are partially offset by lower maintenance expenses, and lower airport rents and landing fees.  Economic fuel cost decreased due to lower raw fuel costs, partially offset by a 2.0% increase in consumption and losses on settled hedges.

Alaska Regional

Pretax profit for Alaska Regional was $21 million in the second quarter of 2014 compared to $15 million the second quarter of 2013. The increased Regional revenue was offset by higher expenses to support additional capacity.

Horizon

Horizon broke even in the second quarter of 2014 compared to pretax profit of $6 million in the second quarter of 2013. CPA Revenues (100% of which are from Alaska and eliminated in consolidation) decreased due to lower reimbursable maintenance expenses. The $2 million increase in Horizon's non-fuel operating expenses was driven largely by increased pilot hiring, a signing bonus related to the labor contract ratified by Horizon's mechanics in June 2014, and higher workers compensation claims.

28

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013 

Our consolidated net income for the first six months of 2014 was $259 million, or $1.86 per diluted share, compared to net income of $141 million, or $0.99 per diluted share, in the first six months of 2013. Significant items impacting the comparability between the periods are as follows:
 	 	
•	Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains and losses related to our fuel hedge positions. For the first six months of 2014, we recognized net mark-to-market gains of $21 million ($13 million after tax, or $0.09 per diluted share) compared to losses of $13 million ($7 million after tax, or $0.05 per diluted share) in the first six months of 2013.	

Excluding the impact of mark-to-market fuel hedge adjustments, our adjusted consolidated net income for the first six months of 2014 was $246 million, or $1.77 per diluted share, compared to an adjusted consolidated net income of $148 million, or $1.04 per share, in the first six months of 2013.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six Months Ended June 30,	
 	2014	 	2013	
(in millions, except per share amounts)	Dollars	 	Diluted EPS	 	Dollars	 	Diluted EPS	
Net income and diluted EPS as reported	$	259	
 	 	$	1.86	
 	 	$	141	
 	 	$	0.99	
 	
Mark-to-market fuel hedge adjustments, net of tax	(13	)	 	(0.09	)	 	7	
 	 	0.05	
 	
Non-GAAP adjusted income and per-share amounts	$	246	
 	 	$	1.77	
 	 	$	148	
 	 	$	1.04	

Our operating costs per ASM are summarized below:

 	Six Months Ended June 30,	
(in cents)	2014	 	2013	 	% Change	
Consolidated:	 	 	 	 	 	
CASM	
 	12.64	¢	 	
 	13.01	¢	 	(2.8	)	
Less the following components:	 	 	 	

Aircraft fuel, including hedging gains and losses	4.14	
 	 	4.55	
 	 	(9.0	)	
CASM excluding fuel	
 	8.50	¢	 	
 	8.46	¢	 	0.5	

Mainline:	 	 	 	 	 	
CASM	
 	11.54	¢	 	
 	11.90	¢	 	(3.0	)	
Less the following components:	 	 	 	

Aircraft fuel, including hedging gains and losses	3.98	
 	 	4.43	
 	 	(10.2	)	
CASM excluding fuel	
 	7.56	¢	 	
 	7.47	¢	 	1.2	

OPERATING REVENUES

Total operating revenues increased $207 million, or 9%, during the first six months of 2014 compared to the same period in 2013.  The changes are summarized in the following table:

 	Six Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Passenger	 	 	 	 	 	
Mainline	$	1,828	
 	 	$	1,692	
 	 	8	
Regional	386	
 	 	374	
 	 	3	
Total passenger revenue	2,214	
 	 	2,066	
 	 	7	
Freight and mail	56	
 	 	56	
 	 	—	
Other - net	327	
 	 	268	
 	 	22	
Total operating revenues	$	2,597	
 	 	$	2,390	
 	 	9	

29

Passenger Revenue – Mainline

Mainline passenger revenue for the first six months of 2014 increased by 8% on a 4.3% increase in capacity and a 3.6% increase in PRASM compared to 2013. The increase in capacity is driven by routes added in the last twelve months. The increase in PRASM was driven by a 3.8% increase in ticket yield and a 0.1 point decrease in load factor compared to the prior-year period. Yields increased due to reallocation of capacity to markets with stronger demand and by a change in revenue allocation between Mainline and Regional service because of certain industry pricing changes. Without the industry change, Mainline yields would have increased by 2.6%.

Passenger Revenue – Regional

Regional passenger revenue increased by $12 million, or 3%, compared to the first six months of 2013, due to a 6.6% decrease in PRASM and a 10.5% increase in capacity. The decrease in PRASM was due to a decline in load factor of 0.8 points and a decrease in ticket yield of 5.7%. The decline in yield was driven mostly by a change in revenue allocation between Mainline and Regional service because of certain industry pricing changes. Without the revenue allocation adjustment, yield would have decreased 2.2%. Additionally, the average trip length for our Regional flights increased 3.2%, which also put downward pressure on yields.

Other – Net

Other - net revenue increased $59 million, or 22%, from the first six months of 2013. Mileage Plan revenue increased $36 million, due to an increase in miles sold, an increase in cash received per mile, and an increase in the percentage of cash proceeds allocated to the marketing deliverables under the new affinity card agreement, which was modified in July 2013. Additionally, bags fees and ticket change fees are up 20% and 11%, respectively, due to changes in our fee structure that took effect in November 2013.

OPERATING EXPENSES

Total operating expenses increased $41 million, or 2%, compared to the first six months of 2013, mostly as a result of higher non-fuel costs. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

 	Six Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Fuel expense	$	718	
 	 	$	753	
 	 	(5	)	
Non-fuel expenses	1,474	
 	 	1,398	
 	 	5	
 	
Total Operating Expenses	$	2,192	
 	 	$	2,151	
 	 	2	

Significant operating expense variances from 2013 are more fully described below.

Wages and Benefits

Wages and benefits increased during the first six months of 2014 by $31 million, or 6%, compared to 2013.  The primary components of wages and benefits are shown in the following table:

 	Six Months Ended June 30,	
(in millions)	2014	 	2013	 	% Change	
Wages	$	421	
 	 	$	380	
 	 	11	
 	
Pension - Defined benefit plans	4	
 	 	25	
 	 	(84	)	
Defined contribution plans	25	
 	 	21	
 	 	19	
 	
Medical and other benefits	72	
 	 	67	
 	 	7	
 	
Payroll taxes	31	
 	 	29	
 	 	7	
 	
Total wages and benefits	$	553	
 	 	$	522	
 	 	6	

Wages increased 11% on a 3.4% increase in FTEs. The primary driver of the increase in wages was annualization of new labor contracts that included higher rates. The increase in FTEs is to support additional aircraft and passengers.

30

Pension expense decreased 84%, compared to the same period in the prior year. The decline is due to the improved funded status of the plan and the freezing of plan benefits for our non-union employees beginning January 1, 2014.

Defined contribution plans increased 19%, due to increased contributions per the new labor agreements.

Medical and other benefits increased 7% compared to the same period in the prior year. The increase was due to higher workers comp claims and rates in the second quarter of 2014 compared to the second quarter of 2013.

We expect wages and benefits to increase for the full year due to the new long term labor deals, more FTEs to support additional aircraft in our fleet, and higher medical and other benefits, slightly offset by lower pension expense.

Variable Incentive Pay

Variable incentive pay expense increased during the first six months of 2014 by $12 million, or 29% compared to 2013. The increase is due to exceeding our incentive plan goals by more than we were exceeding our prior-year goals at this time last year. For the full year of 2014, we currently expect incentive pay to be approximately $113 million compared to the $88 million recorded in 2013, but actual amounts could differ based on third and fourth quarter performance.

Aircraft Fuel

Aircraft fuel expense increased $35 million, compared to 2013. The elements of the change are illustrated in the following table: 

 	Six Months Ended June 30,	
 	2014	 	2013	
(in millions, except for per gallon amounts)	Dollars	 	Cost/Gallon	 	Dollars	 	Cost/Gallon	
Raw or "into-plane" fuel cost	$	712	
 	 	$	3.14	
 	 	$	704	
 	 	$	3.22	
 	
(Gains) losses on settled hedges	27	
 	 	0.12	
 	 	36	
 	 	0.16	
 	
Consolidated economic fuel expense	739	
 	 	3.26	
 	 	740	
 	 	3.38	
 	
Mark-to-market fuel hedge adjustments	(21	)	 	(0.09	)	 	13	
 	 	0.06	
 	
GAAP fuel expense	$	718	
 	 	$	3.17	
 	 	$	753	
 	 	$	3.44	
 	
Fuel gallons	227	
 	 	 	 	219	

The raw fuel price per gallon decreased 2.5% as a result of lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during the first six months of 2014 was due to decreases in refining margins of 24.7%, partially offset by an increase in crude oil prices of 7.1%.
 
Losses recognized for hedges that settled during the year were $27 million in 2014, compared to $36 million in 2013.  These amounts represent the cash paid for premium expense, offset by cash received from those hedges. The decrease in losses on settled hedges is primarily due to the premiums for hedges that we entered into up to three years ago. The majority of these hedges were purchased "at the money" resulting in a higher premium than under our current strategy of purchasing "out of the money" hedges.

Beginning in the third quarter, we have discontinued the hedge program for refining margins. We currently expect our economic fuel price per gallon to be lower in the third quarter of 2014 compared to the third quarter of 2013 due to our current estimate of lower refining margins, offset by higher average crude prices. For the full year, we expect our economic fuel price per gallon to be lower than the prior year primarily due to lower refining margins and a decrease in hedge premium expense, offset by higher average crude prices.

Aircraft Maintenance

Aircraft maintenance decreased by $25 million, or 19%, compared to the prior-year period. The decrease is primarily due to a reduction in the number of engines covered by power-by-the-hour (PBH) contracts in the prior year, along with reduced flying on the engines that are still under the remaining PBH contract. Additionally, we have experienced fewer maintenance events in the current year compared to prior year, and have less lease return provision costs in the current year compared to the prior year.

31

For the full year, we expect aircraft maintenance to be lower than 2013 for the reasons above.

Landing Fees and Other Rentals

Landing fees and other rentals decreased $3 million, or 2%, compared to the first six months of 2013. The decrease is primarily due to higher imposed rates for the Port of Seattle in the prior year and to the refund we received from Port of Seattle for overpayment in the current year, offset by increased rates in Los Angeles, Portland, and San Diego airports. and increased volumes throughout the network.

For the full year, we expect landing fees and other rents to increase to support increased flying.

Contracted Services

Contracted services expense increased $15 million, or 14%, compared to the first six months of 2013. The increase is primarily due to an increase in CPA flying with SkyWest, and increased contract ramp handling at new stations and rate increases in Seattle. For the full year, we expect contracted services to be higher than 2013, as we fly to more locations that are staffed with outside vendors, and due to an increase in passenger volume.

Selling Expenses

Selling expenses increased $10 million, or 11%, compared to the first six months of 2013. The increase is primarily due to increased promotional and advertising activity most notably in the Seattle area. For the full year, we expect selling expenses to be higher than in 2013, as we continue to build awareness in the communities we serve.

Other Operating Expenses

Other operating expenses increased $28 million, or 21%, compared to the first six months of 2013.  The increase is due to higher professional fees, IT costs, and property taxes. For the full year, we expect other expenses to increase due to various IT projects and higher property taxes.

Additionally, we are presenting our line-item expenses below both in absolute dollars and on an ASM basis to highlight areas in which costs have increased or decreased either more or less than capacity.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six Months Ended June 30,	
 	2014	 	2013	 	2014	 	2013	 	%Change	
(in millions, except CASM)	Amount	 	Amount	 	CASM	 	CASM	 	CASM	
Wages and benefits	$	553	
 	 	$	522	
 	 	
 	3.19	¢	 	
 	3.16	¢	 	0.9	 %	
Variable incentive pay	54	
 	 	42	
 	 	0.31	
 	 	0.25	
 	 	24.0	 %	
Aircraft maintenance	108	
 	 	133	
 	 	0.62	
 	 	0.80	
 	 	(22.5	)%	
Aircraft rent	57	
 	 	59	
 	 	0.33	
 	 	0.36	
 	 	(8.3	)%	
Landing fees and other rentals	133	
 	 	136	
 	 	0.77	
 	 	0.82	
 	 	(6.1	)%	
Contracted services	122	
 	 	107	
 	 	0.70	
 	 	0.65	
 	 	7.7	 %	
Selling expenses	99	
 	 	89	
 	 	0.57	
 	 	0.54	
 	 	5.6	 %	
Depreciation and amortization	143	
 	 	136	
 	 	0.82	
 	 	0.82	
 	 	—	 %	
Food and beverage service	44	
 	 	41	
 	 	0.25	
 	 	0.25	
 	 	—	 %	
Other	161	
 	 	133	
 	 	0.94	
 	 	0.81	
 	 	16.0	 %	
Non-fuel Expenses	$	1,474	
 	 	$	1,398	
 	 	
 	8.50	¢	 	
 	8.46	¢	 	0.5	 %	

32

LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sources of liquidity are:

•	Our existing cash, marketable securities balance of $1.5 billion;	

•	Our expected cash from operations; 	

•	Our 73 unencumbered aircraft as of June 30, 2014, in our operating fleet that could be financed, if necessary;	

•	Our combined $200 million bank line-of-credit facilities, with no outstanding borrowings.	
  
During the first six months of 2014, we purchased seven 737-900ER aircraft with cash on hand and made debt payments totaling $64 million. In addition, we continued to return capital to our shareholders by paying $34 million in quarterly dividends and repurchasing $83 million of our common stock.

During the second quarter, the Company was rated BBB- by Fitch Ratings, and is now one of two U.S. airlines with investment-grade credit ratings.

In our cash and marketable securities portfolio, we invest only in securities that meet our overall investment policy of maintaining and securing investment principal. Our investment portfolio is managed by reputable firms that adhere to our investment policy that sets forth certain objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy and the portfolio managers are continually reviewed to ensure that the investments align with our strategy.

The table below presents the major indicators of financial condition and liquidity: 

(in millions, except per share and debt-to-capital amounts)	June 30, 2014	 	December 31, 2013	 	Change	
Cash and marketable securities	$	1,510	
 	 	$	1,330	
 	 	13.5	 %	
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue	33	%	 	31	%	 	2 pts	
 	
Long-term debt, net of current portion	$	745	
 	 	$	754	
 	 	(1.2)	 %	
Shareholders’ equity	$	2,200	
 	 	$	2,029	
 	 	8.4	 %	
Long-term debt-to-capital including net present value of aircraft operating lease payments (a)	32%:68%	
 	 	35%:65%	
 	 	(3) pts	

(a) 	 Calculated using the present value of remaining aircraft lease payments.	

Given our strong financial condition, we will continue to evaluate our cash flows from operations, reinvest in the business, and allocate capital to our shareholders, while maintaining a strong liquidity position.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.

ANALYSIS OF OUR CASH FLOWS
 
Cash Provided by Operating Activities
 
For the first six months of 2014, net cash provided by operating activities was $635 million, compared to $592 million during the same period in 2013. The $43 million increase was primarily attributable to an increase in cash flows from passenger revenues, an increase in our advance ticket sales, and more miles sold under our Mileage Plan program, partially offset by increased operating expenses to support 5.2% more flying and $87 million more paid in cash taxes.

We typically generate positive cash flows from operations and expect to use that cash flow to buy airplanes and capital equipment, make normal debt payments, and to return capital to shareholders through share repurchases and dividends.

33

Cash Used in Investing Activities
 
Cash used in investing activities was $582 million during the first six months of 2014, compared to $512 million during the same period of 2013. Our capital expenditures were $350 million in the first six months of 2014, due to the delivery of seven 737-900ER aircraft, the exercise of four 737-900ER options, and deposits related to a Q400 that we expect to take delivery of in February 2015. Additionally, we invested $41 million in our cabin improvement project, where as of June 30, 2014, we have upgraded 39 aircraft with new Recaro seats and power at every seat.

The table below reflects the full-year expectation for total capital expenditures and the additional expenditures if options were exercised. These options will be exercised only if we believe return on invested capital targets can be met.

(in millions)	2014	 	2015	 	2016	 	2017	
Aircraft and aircraft purchase deposits - firm	$	340	
 	 	$	390	
 	 	$	325	
 	 	$	355	
 	
Other flight equipment	125	
 	 	35	
 	 	35	
 	 	25	
 	
Other property and equipment	85	
 	 	80	
 	 	75	
 	 	75	
 	
Total property and equipment additions	$	550	
 	 	$	505	
 	 	$	435	
 	 	$	455	
 	
Option aircraft and aircraft deposits, if exercised(a)	$	10	
 	 	$	225	
 	 	$	260	
 	 	$	270	

(a) 	We have options to acquire 58 B737 aircraft with deliveries in 2016 through 2024, and options to acquire seven Q400 aircraft with deliveries in 2015 to 2018. Based on current fleet plans, we expect to exercise at least two B737 options for delivery in 2016, which would increase the total capital expenditures noted in the table.	

Cash Used by Financing Activities
 
Net cash used by financing activities was $111 million during the first six months of 2014 compared to $145 million during the same period in 2013. During the first six months of 2014 we made debt payments of $64 million, stock repurchases of $83 million, and dividend payments totaling $34 million. In addition, we financed three Q400 aircraft for $51 million.

Bank Line-of-Credit Facilities
 
We have two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in August 2015, is secured by aircraft. The other $100 million facility, which expires in March 2017, is secured by certain accounts receivable, spare engines, spare parts and ground service equipment.
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
Aircraft Purchase Commitments
 
As of June 30, 2014, we have firm orders to purchase 67 aircraft. We also have options to acquire 58 additional B737s and options to acquire seven Q400s.
 
The following table summarizes expected fleet activity by year:

 	Actual Fleet Count	 	Expected Fleet Activity(a)	
Aircraft	Dec 31, 2013	 	Jun 30, 2014	 	Remaining 2014	 	Dec 31, 2014	 	2015 Changes	 	Dec 31, 2015	
737 Freighters & Combis	6	
 	 	6	
 	 	—	
 	 	6	
 	 	—	
 	 	6	
 	
737 Passenger Aircraft(b)	125	
 	 	128	
 	 	3	
 	 	131	
 	 	4	
 	 	135	
 	
Total Mainline Fleet	131	
 	 	134	
 	 	3	
 	 	137	
 	 	4	
 	 	141	
 	
Q400	51	
 	 	51	
 	 	—	
 	 	51	
 	 	1	
 	 	52	
 	
Total	182	
 	 	185	
 	 	3	
 	 	188	
 	 	5	
 	 	193	

(a) 	Expected fleet activity includes aircraft deliveries, net of planned retirements and lease returns.	
 	 	
(b) 	Reflects potential extensions of leased aircraft or postponed retirement of 737-400s.	

For future firm orders and if we exercise our options for additional deliveries, we may finance the aircraft through internally generated cash, long-term debt, or lease arrangements.

34

Future Fuel Hedge Positions

Historically, we have used both call options on crude oil forwards and swap instruments on refining margins to hedge against price volatility of future jet fuel consumption. Beginning in the third quarter, we have discontinued the hedge program for refining margins. Currently, we have refining margin swaps in place for approximately 23% of our third quarter 2014 estimated jet fuel purchases at an average price of 50 cents per gallon. Our crude oil positions are as follows:

 	Approximate % of Expected Fuel Requirements	 	Weighted-Average Crude Oil Price per Barrel	 	Average Premium Cost per Barrel	
Third Quarter 2014	50	%	 	$104	 	$7	
Fourth Quarter 2014	50	%	 	$106	 	$5	
   Full Year 2014	50	%	 	$105	 	$6	
First Quarter 2015	40	%	 	$106	 	$5	
Second Quarter 2015	30	%	 	$104	 	$5	
Third Quarter 2015	20	%	 	$106	 	$5	
Fourth Quarter 2015	11	%	 	$106	 	$5	
Full Year 2015	25	%	 	$105	 	$5	
First Quarter 2016	6	%	 	$105	 	$4	
Full Year 2016	1	%	 	$105	 	$4	

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we benefit from a decline in crude oil prices, as there is no cash outlay other than the premiums we pay to enter into the contracts.

Contractual Obligations
 
The following table provides a summary of our principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and other obligations as of June 30, 2014:

(in millions)	Remainder of 2014	 	2015	 	2016	 	2017	 	2018	 	Beyond 2018	 	Total	
Current and long-term debt obligations	$	56	
 	 	$	117	
 	 	$	115	
 	 	$	121	
 	 	$	151	
 	 	$	299	
 	 	$	859	
 	
Operating lease commitments(a)	73	
 	 	192	
 	 	168	
 	 	135	
 	 	72	
 	 	254	
 	 	894	
 	
Aircraft purchase commitments	149	
 	 	423	
 	 	359	
 	 	382	
 	 	430	
 	 	1,037	
 	 	2,780	
 	
Interest obligations(b)	20	
 	 	37	
 	 	33	
 	 	28	
 	 	22	
 	 	28	
 	 	168	
 	
Other obligations(c)	30	
 	 	54	
 	 	32	
 	 	32	
 	 	14	
 	 	—	
 	 	162	
 	
Total	$	328	
 	 	$	823	
 	 	$	707	
 	 	$	698	
 	 	$	689	
 	 	$	1,618	
 	 	$	4,863	

(a) 	Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases.	
 	 	
(b) 	For variable-rate debt, future obligations are shown above using interest rates in effect as of June 30, 2014.	
 	 	
(c) 	Includes minimum obligations under our long-term PBH maintenance agreement and obligations associated with third-party CPAs with SkyWest and PenAir. Refer to the "Commitments" note in the condensed consolidated financial statements for further information.	

 Credit Card Agreements
 
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to, or below, a rating specified by the agreement or our cash and marketable securities balance falls below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance falls below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

35

Deferred Income Taxes

For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 20 years to an estimated salvage value using the straight-line basis. This difference, along with other deferred liabilities and offset by deferred assets, have created a significant deferred tax liability. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid.

Taxable income and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), availability of "bonus depreciation", and other legislative changes that are out of our control. We believe that we have the liquidity to make our future tax payments.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates for the three months ended June 30, 2014. For
information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2013.

 	
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	
 
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 	
ITEM 4. CONTROLS AND PROCEDURES	
 
Evaluation of Disclosure Controls and Procedures

As of June 30, 2014, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of June 30, 2014.
 
Changes in Internal Control over Financial Reporting
 
We made no changes in our internal control over financial reporting during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our internal control over financial reporting is based on the 1992 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). We began migrating to the 2013 COSO Framework in the second quarter of 2014.

36

PART II

 	
ITEM 1. LEGAL PROCEEDINGS	
 
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

 	
ITEM 1A. RISK FACTORS	

There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. However, you should carefully consider the factors discussed in such section of our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 	
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	

This table provides certain information with respect to our purchases of shares of our common stock during the second quarter of 2014.  

 	Total Number of
Shares Purchased	 	Average Price
Paid per Share	 	Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs	 	Maximum remaining
dollar value of shares
that can be purchased
under the plan (in millions)	
April 1, 2014 - April 30, 2014	194,564	
 	 	$	46.42	
 	 	194,564	
 	 	 	
May 1, 2014 - May 31, 2014	469,446	
 	 	48.28	
 	 	469,446	
 	 	 	
June 1, 2014 - June 30, 2014	444,324	
 	 	48.45	
 	 	444,324	
 	 	 	
Total	1,108,334	
 	 	$	47.61	
 	 	1,108,334	
 	 	$	650	

The shares were purchased pursuant to a $250 million repurchase plan authorized by the Board of Directors in September 2012. In May 2014, the Board of Directors authorized a $650 million share repurchase program, which began immediately after the $250 million program was completed in early July 2014.

 	
 	
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	

None

 	
ITEM 4. MINE SAFETY DISCLOSURES	

None

 	
ITEM 5. OTHER INFORMATION	
 
None

37

 	
 	
ITEM 6. EXHIBITS	
 
The following documents are filed as part of this report:
 	 	
1.	Exhibits: See Exhibit Index.	

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	 	
ALASKA AIR GROUP, INC.	 	
 	 	
/s/ BRANDON S. PEDERSEN	 	
Brandon S. Pedersen	 	
Executive Vice President/Finance and Chief Financial Officer	 	
(Principal Financial and Accounting Officer)	 	
 	 	
August 6, 2014	 	

38

EXHIBIT INDEX

 	 	
Exhibit
Number	Exhibit
Description	
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
3.1	Amended and Restated Certificate of Incorporation of Registrant	
101.INS	XBRL Instance Document	
101.SCH	XBRL Taxonomy Extension Schema Document	
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	

39

Alaska Air Group, Inc. By: State of Delaware Secretary of State Division of-Corporations Delivered 07:44 PM 05/19/2014 FILED 07:39 PM 05/19/2014 SRV 140661160 - 2057097 FILE CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ALASKA AIR GROUP, INC. ALASKA AIR GROUP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. That at meetings of the Board of Directors of Alaska Air Group, Inc., resolutions were duly adopted setting forth proposed amendments to the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendments to be advisable and submitting said amendments at a meeting of the stockholders of said corporation for consideration thereof. That thereafter, pursuant to resolutions of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held on May 8, 2014, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware and at which meeting the necessary number of shares as required by statute were voted in favor of the amendments. 2. That Section 4.1 of Article 4 of the Amended and Restated Certificate of Incorporation of Alaska Air Group, Inc. is hereby amended and restated in full as follows: "Section 4.1 Authorized Capital. The total number of shares of all classes of stock which this corporation shall have authority to issue is 205,000,000 shares, of which 5,000,000 shares shall be preferred stock having a par value of $0.01 per share and 200,000,000 shares shall be common stock having a par value of $0.01 per share." 3. That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Alaska Air Group, Inc. has caused this certificate to be signed by Shannon K. Alberts, its Corporate Secretary, this 19 th day of May, 2014. Shannon K. Alberts Corporate Secretary

 

Exhibit 1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ALASKA AIR GROUP, INC. Effective May 16, 2006. Originally incorporated March 15, 1985. This amended and restated Certificate of Incorporation is being filed pursuant to Section 242 and 245. ARTICLE 1. NAME The name of this corporation is Alaska Air Group, Inc. ARTICLE 2. REGISTERED OFFICE AND AGENT The address of the initial registered office of this corporation is Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware 19808, and the name of its initial registered agent at such address is Corporation Service Company. ARTICLE 3. PURPOSES The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE 4. SHARES 4.1 Authorized Capital. The total number of shares of all classes of stock which this corporation shall have authority to issue is 105,000,000 shares, of which 5,000,000 shares shall be preferred stock having a par value of $1.00 per share and 100,000,000 shares shall be common stock having a par value of $1.00 per share. 4.2 Issuance of Preferred Stock in Series. The Board of Directors of this corporation (the "Board of Directors") is expressly authorized to adopt, from time to time, a resolution or resolutions providing for the issuance of preferred stock in one or more series, to fix the number of shares in each such series and to fix the designations and the powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions, of each such series, including, but not limited to, dividend rates, conversion rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices and liquidation preferences. Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such series may be made dependent upon facts ascertainable outside of this Certificate of Incorporation or of any amendment hereto, or outside the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors, provided that the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such series is clearly and expressly set forth in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.

 

Alaska Air Group, Inc. May 16, 2006 Amended and Restated Certificate of Incorporation Page 2 4.3 Dividends. Subject to any preferential rights granted for any series of preferred stock, the holders of shares of the common stock shall be entitled to receive dividends, out of the funds of this corporation legally available therefor, at such rates and at such times as may be determined by the Board of Directors. The holders of shares of the preferred stock shall be entitled to receive dividends to the extent determined by the Board of Directors in designating the particular series of preferred stock. 4.4 Voting. The holders of shares of the common stock, on the basis of one vote per share, shall have the right to vote for the election of members of the Board of Directors and the right to vote on all other matters, except those matters in which a separate class of stockholders vote by class or series. To the extent provided in a resolution of the Board of Directors authorizing the issue of a series of preferred stock, the holders of each such series shall have the right to vote for the election of members of the Board of Directors and the right to vote on all other matters, except those matters in which a separate class of stockholders vote by class or series. ARTICLE 5. INCORPORATOR The name and mailing address of the incorporator is: Jan David Blais 19300 Pacific Highway South Seattle, Washington 98188 ARTICLE 6. DIRECTORS The Board of Directors shall be composed of no less than nine and no more than fifteen Directors, the specific number to be set by resolution of the Board of Directors; provided, that the Board of Directors may be less than nine until vacancies are filled. The number of Directors of the corporation shall be fixed from time to time by or pursuant to the By-Laws. Each Director who is serving as a Director on the date of this Restated Certificate of Incorporation and who was elected or appointed after May 16, 2006 shall hold office until the next annual meeting of stockholders and until a successor has been elected and qualified, subject to prior death, disability, resignation, retirement, disqualification or removal from office. Directors elected prior to or on May 16, 2006, including those elected at the 2006 Annual Meeting, shall continue to hold office until the expiration of the three-year terms for which they were elected, subject to prior death, disability, resignation, retirement, disqualification or removal from office. Any person elected to a newly-created director position or any person elected to fill a vacancy shall serve until the next annual meeting and until a successor has been elected and qualified, subject to prior death, disability, resignation, retirement, disqualification or removal from office. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. ARTICLE 7. BOARD OF DIRECTORS The names and mailing addresses of the persons who are to serve as Directors until the annual meeting of stockholders at which their term expires or until their successors are elected and qualify are: Name Mailing Address

 

Alaska Air Group, Inc. May 16, 2006 Amended and Restated Certificate of Incorporation Page 3 William S. Ayer 19300 International Boulevard Seattle, Washington 98188 Patricia M. Bedient 19300 International Boulevard Seattle, Washington 98188 Phyllis J. Campbell 19300 International Boulevard Seattle, Washington 98188 Mark R. Hamilton 19300 International Boulevard Seattle, Washington 98188 Bruce R. Kennedy 19300 International Boulevard Seattle, Washington 98188 Jessie J. Knight, Jr. 19300 International Boulevard Seattle, Washington 98188 R. Marc Langland 19300 International Boulevard Seattle, Washington 98188 Dennis F. Madsen 19300 International Boulevard Seattle, Washington 98188 Byron I. Mallott 19300 International Boulevard Seattle, Washington 98188 John V. Rindlaub 19300 International Boulevard Seattle, Washington 98188 J. Kenneth Thompson 19300 International Boulevard Seattle, Washington 98188 Richard A. Wien 19300 International Boulevard Seattle, Washington 98188 ARTICLE 8. BYLAWS The Board of Directors shall have the power to adopt, amend or repeal the Bylaws for this corporation, at a duly called meeting or by written consent in accordance with Article 9, subject to the power of the stockholders to adopt, amend or repeal such Bylaws, and, to the extent, if any, provided by resolution of the Board of Directors providing for the issue of a series of preferred stock, by the affirmative vote of the holders of not less than a majority of the outstanding shares of each such series entitled to vote thereon.

 

Alaska Air Group, Inc. May 16, 2006 Amended and Restated Certificate of Incorporation Page 4 ARTICLE 9. ACTION BY STOCKHOLDERS WITHOUT A MEETING Any action which could be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a written consent setting forth the action so taken is signed by all stockholders entitled to vote with respect to the subject matter thereof. ARTICLE 10. LIMITATION OF DIRECTOR LIABILITY To the full extent that the Delaware General Corporation Law, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of directors, a Director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for conduct as a Director. Any amendment to or repeal of this Article 10 shall not adversely affect any right or protection of a Director of the corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment or repeal. Terms of the masculine gender used for convenience in this Amended and Restated Certificate of Incorporation should be understood in the feminine gender where appropriate. IN WITNESS WHEREOF, said Alaska Air Group, Inc. has caused this certificate to be signed by its Chairman, Chief Executive Officer and President, and attested by its Secretary this 6th day of July, 2006. Alaska Air Group, Inc. By __/S/WILLIAM S. AYER/_________________ William S. Ayer Chairman, President & Chief Executive Officer ATTEST: By __/S/KEITH LOVELESS/_________________ Keith Loveless, General Counsel and Corporate Secretary

 

EXHIBIT 31.1
CERTIFICATIONS
I, Bradley D. Tilden, certify that:
 	 	
1.	I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended June 30, 2014;	

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:	

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	

b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	

c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	

d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

e)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:	

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

August 6, 2014 

By	/s/ BRADLEY D. TILDEN	
 	Bradley D. Tilden	
 	Chairman, President and Chief Executive Officer	

EXHIBIT 31.2
CERTIFICATIONS
I, Brandon S. Pedersen, certify that:
 	 	
1.	I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended June 30, 2014;	

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:	

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	

b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	

c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	

d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:	

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

August 6, 2014 

By	/s/ BRANDON S. PEDERSEN	
 	Brandon S. Pedersen	
 	Executive Vice President/Finance and Chief Financial Officer	

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley D. Tilden, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 	 	
(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and	

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

August 6, 2014

By	/s/ BRADLEY D. TILDEN	
 	Bradley D. Tilden	
 	Chairman, President and Chief Executive Officer	

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brandon S. Pedersen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 	 	
(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and	

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

August 6, 2014 

By	/s/ BRANDON S. PEDERSEN	
 	Brandon S. Pedersen	
 	Executive Vice President/Finance and Chief Financial Officer